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Although inflation remains above the RBI’s medium-term target of 4%, experts believe the rate cut is likely due to sluggish economic growth
The Reserve Bank of India (RBI) is expected to cut interest rates for the first time in nearly five years
The Reserve Bank of India (RBI) is expected to cut interest rates for the first time in nearly five years this Friday. According to economists, treasury heads from banks, and market experts, the newly formed Monetary Policy Committee (MPC), which will meet from February 4-7, may announce a rate cut. Under Sanjay Malhotra’s new RBI Governor’s leadership, the committee is expected to reduce the repo rate, or the benchmark lending rate, by 25 basis points (bps) from 6.5% to 6.25%. The decision will be announced on February 7.
Although inflation remains above the RBI’s medium-term target of 4%, experts believe the rate cut is likely due to sluggish economic growth, the government’s advance estimates, and several liquidity-boosting measures already implemented.
Last week, the RBI announced plans to inject Rs 1.5 lakh crore into the banking system, following a Rs 1.16 lakh crore liquidity infusion in December, prompted by a 50 bps reduction in the cash reserve ratio (CRR). The central bank will also conduct a $5 billion dollar-rupee buy/sell swap auction with a six-month tenor.
A rate cut at this point is expected to provide a much-needed boost to India’s consumption demand. Coupled with income tax relief for taxpayers earning up to Rs 12 lakh, economists believe the rate cut could help stimulate further consumption growth.
“We maintain our expectation of a rate cut in February for India, with inflation showing visible signs of moderation. A sharp reduction in food prices, led by vegetables, is likely to bring CPI inflation to 4.5% in January,” said Gaura Sengupta, Chief Economist at IDFC First Bank.
Economists and market experts that Moneycontrol spoke with suggest that India may see a further 50-75 bps reduction in benchmark rates in 2025. Following the anticipated February cut, another 25-50 bps reduction may occur in the months ahead. However, an economist from a leading foreign bank cautioned that it is still too early to predict actions for April or July, noting that global factors, such as US inflationary pressures, will influence India’s decisions. “It was expected that the US would take aggressive rate action, but that no longer seems to be the case. India must watch incoming data closely,” he said.
Despite pressures from the Trump presidency, the US Federal Reserve paused interest rate cuts last week after reducing them by 25 bps in December 2024.
Global factors are also influencing the RBI’s policy response. The rupee has weakened over 3% since November, reaching 86.6 per dollar. Efforts to stabilize the currency by selling US dollars have led to liquidity challenges, which the RBI is addressing through various measures. Some believe that this could lead the central bank to delay its rate cut until April, allowing for better control over liquidity and currency movements.
A report from DBS Group Research emphasized that, amid decelerating inflation, a temporary pause in the dollar rally, signs of soft demand, and ongoing fiscal consolidation, the RBI’s monetary policy will likely adopt a growth-supportive tone.
Although the repo rate has remained unchanged for nearly two years, in October 2024, the MPC shifted its stance from ‘Withdrawal of accommodation’ to ‘Neutral,’ indicating that the rate-setting committee is open to adjusting its approach to monetary management, though a rate cut was not expected at that time.
